Lease agreements challenging with cloudy farm program future

A foggy crystal ball looking into the future of the U.S. farm program is making it difficult to determine how or whether to continue current leases into the 2007 crop year.

The lack of policy direction is postponing decisions on leases because, according to Iowa State University Extension farm management specialist Steve Johnson, farmers and landowners are unable to nail down specific income levels on which rental agreements are often based. This compounds the problem when combined with higher crop production inputs, which Johnson says are driving growers to make input decisions earlier and earlier.

"With lease terminations coming Sept. 1, it becomes more important to know 'do you have that farm next year?'" Johnson says. "Where we're going with row-crop agriculture now, the decisions to plant the crop next year, more than anyone could imagine, are being made now. It's earlier than ever.

"And you're going to see these farmers make their decisions now based on price."

In times like these when price supports -- and corresponding income levels in general -- are uncertain, Johnson says being able to nail down a longer-term lease arrangement can help hedge against volatility. Approaching such agreements with flexibility in terms can make them more attractive for the landowner.

"To the well-managed farm, let's negotiate three- to five-year farm leases now. A tool we should have adopted in the 1990s is this flexible rental arrangement," Johnson says. "Let's create a flexible cash rent, an incentive for that landowner to rent me that land for a longer period of time."

Incentive can come in an increased share of income for the landowner as yields and/or sales increase. Reaching certain production benchmarks like 140 bushels per acre for corn, Johnson says, can trigger an added incentive for the landowner.

In the near term, Johnson says one way landowners can hedge potential future change is by simply raising cash rental rates slightly, assuming the growth of renewable fuels production remains a bullish factor in the corn and soybean markets. Then, rely on flexibility in leasing terms for rental rate changes down the road.

"If it's a well-managed farm and I'm concerned about cash rents getting out of hand, add in five bucks more an acre," he says. "If I'm a landowner seeing the biofuels boom coming, collect a minimum rent and build in incentives for more.

"I think we're going to see some lease terminations but not a large number for 2007, because a lot of farmers are waiting on a 2007 farm program."

For the tenant, Johnson says one key to making lease arrangements for 2007 will be preparation, namely in managing and storing old crop stocks. In general, however, prior planning and management will remain important for the grower in making rental agreements.

"I would have been out of old-crop a month ago. Let's match sales to cash-flow needs rather than wait until December and January to figure out when I need the cash. This is the ability you have with your own on-farm storage," Johnson says. "I think the well-managed, capitalized farms are going to excel in not just growing more corn, but things like pre-harvest planning and tying up genetics well in advance.